19859

VAT – preliminary point – whether tribunal should exercise its discretion to grant extension of time to appeal where input tax claim made by voluntary disclosure only in last accounting period before time barred and appeal itself made 15 months after disputed decision made – application refused 

MANCHESTER TRIBUNAL CENTRE

 
                                 THE MEDICAL HOUSE PLC 			 Appellant 
					
                                                       and
				          
			   THE COMMISSIONERS FOR
		HER MAJESTY’S REVENUE AND CUSTOMS                 Respondents

		Tribunal:	David Demack (Chairman)

Sitting in  private in Manchester on 4 September 2006 

Mr Adam Rycroft, KPMG, Manchester, for the Appellant  

Mr Jonathan Cannan of counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2006

DECISION 

1.	On 5 October 2003, the appellant company, the Medical House plc (“Medical House”), by letter made a voluntary disclosure seeking repayment of input tax of £26,165 on the professional fees it incurred in connection with the listing of its shares on the Alternative Investment Market (AIM).  The fees were incurred in accounting period 09/00, but Medical House made no claim for input tax credit in its return for that period.  Following the provision of further information requested by what are now Her Majesty’s Commissioners for Revenue and Customs (“HMRC”), they rejected the claim by letter of 29 April 2004.  On 12 May 2004, Medical House sought a reconsideration of HMRC’s decision.  That reconsideration, given on 17 September 2004, confirmed the earlier decision and included reference to Medical House’s right of appeal (implicitly pursuant to regulation 4(2) of the VAT Tribunal Rules 1986, as amended). Having explained HMRC’s then policy of treating VAT on costs related to the issue of shares used to raise capital as exempt input tax, the reviewing officer, Mr D Waterhouse, concluded from the offer for sale that the purpose of Medical House’s share offer was “to provide further working capital”.  He continued:

“I therefore conclude that the purpose of the listing and the issue was to raise finance and uphold the decision to refuse the claim. 

You have a period 21 days from the date of this notification to appeal to an independent Value Added Tax Tribunal regarding the decision upheld by this letter”.  

2.	By letter of 30 September 2004 (but apparently not received by HMRC until 16 December 2004), Medical House informed HMRC that it would have no alternative but to appeal the decision if they were unwilling to accept the facts it had disclosed.  HMRC responded on 24 January 2005 indicating that they were prepared to carry out a further review if new evidence justifying that step were to be provided.  No such evidence was provided. 

3.	On 24 February 2005 Advocate-General Jacobs delivered his opinion in Kretztechnik AG v Finanzamt Linz (Case C-465/03) to the Court of Justice of the European Communities (“the ECJ”).  The ECJ gave judgment in the case on 26 May 2005.  It is reported at [2005] STC 1118.  The ECJ decided that since the aim of the share issue there in point was to raise capital, it did not constitute a supply of services and did not fall within article 2(1) of the EC Sixth VAT Directive (77/388/EEC).  As the share issue was an operation not falling within the scope of the Sixth Directive and the operation was carried out by Kretztechnik in order to increase its capital for the benefit of its economic activity in general, costs of the supplies acquired in connection with the operation concerned formed part of its overheads and were therefore component parts of the price of its products.  It was entitled to deduct all the tax charged on the expenses incurred in connection with the share issue. 

4.	It is common ground that the input tax claimed by Medical House would now be recoverable on the basis of the Kretztechnik decision.

5.	On 9 June 2005 Medical House wrote to HMRC referring to the Kretztechnik judgment, and invited them to make repayment of the input tax earlier denied.  HMRC’s review officer submitted the letter to their voluntary disclosure team, and in a letter of 18 July 2005 indicated to Medical House that its claim of 5 October 2003 would be processed, subject to the normal checking procedure.  The relevant parts of the July letter were in the following terms: 

“As you are aware, the ECJ’s ruling in Kretztechnik has been published, the decision being that the issue of new shares is not a supply for VAT purposes and that costs relating to the issue of new shares should be recoverable to the extent that a business makes taxable supplies. 

In view of this, I have forwarded your letter to the Voluntary Disclosure Team, Peter Bennett House, Redvers Close, West Park Ring Road, Leeds, West Yorkshire, LS16 6RQ. 

Subject to their normal checking procedure and your taxable status, they will process your claim dated 5 October 2003, in respect of professional fees incurred in connection with the listing of the Medical House plc on the Alternative Investment Market. 

If you require further information regarding this matter, please contact the Voluntary Disclosure Team on 01133 89 4200”. 

6.	On 12 September 2005 HMRC’s voluntary disclosure team manager wrote to Medical House indicating that HMRC regarded the letter of 9 June 2005 as a new claim for repayment:   it was therefore subject to the three year cap, (see regulation 29, VAT General Regulations 1995) and would not be processed.  On 30 September 2005, Medical House requested yet a further reconsideration, claiming that it had not appealed to the tribunal within the time limit set out in the Tribunal Rules because it had been acting on HMRC’s interpretation of the law pre-Kretztechnik, which had proved to be incorrect.  By letter of 24 November 2005, HMRC confirmed their decision of 12 September 2005.   In the November letter Mr Waterhouse informed Medical House that HMRC considered that its voluntary disclosure had been rejected on 17 September 2004. 

7.	Mr Jonathan Cannan, counsel for HMRC, observed that in the circumstances it was necessary for Medical House to obtain an extension of time in which to appeal.  The decision appealed against was made on 29 April 2004, so that by the Tribunal Rules the time for appealing expired 30 days thereafter, except that, arguably, time was implicitly extended under rule 4(2) by the request for reconsideration.  Even on that basis (on which both parties appeared to have proceeded), the time limit for appealing expired 21 days after the reconsideration of 17 September 2004.  Save as might be directed by the tribunal, there could be no further extension of time. 

8.	In Mr Cannan’s submission, the approach to Medical House’s application for an extension of time should follow the lines taken by the tribunal in earlier decisions based on the approach of the higher courts in dealing with applications to extend time, in particular time to appeal. 

9.	Mr Cannan recorded that the question of whether time to appeal should be extended had previously been considered by reference to: 

a.	the length of the delay;
b.	the reasons for the delay;
c.	the chances of the appeal succeeding if an extension were to be granted; and 
d.	the degree of prejudice to HMRC were an extension to be granted 

10.	But those considerations had been made by reference to pre-Common Procedure Rules (CPR).    Post CPR, Mr Cannan maintained that the higher courts’  approach was to consider matters by reference to the overriding objective to deal with cases justly and to avoid “judge-made check lists”.  They considered all the relevant circumstances and, in particular, the following matters set out in rule 3.9:

a.	the interests of the administration of justice;
b.	whether the application for relief had been made properly;
c.	whether the failure to comply was intentional;  
d.	whether there was good explanation for the failure;
e.	compliance with other rules, practice directions etc;
f.	whether the failure was caused by the party or his legal representative; 
g.	whether any fixed date could still be met; 
h.	the effect which the failure to comply had had on each party; 
i.	the effect which the granting of relief would have on each party.

11.	Further, it was only where the case for granting relief was evenly balanced that 
the court should have any regard to the merits, Sayers v Clarke Walker [2002] EWCA Civ 645.

12.	In the instant case, where the question was one of extending time to appeal to the tribunal, Mr Cannan submitted that the circumstances fell to be considered under a number of heads. 

13.	a)  the interests of the administration of justice. 
Mr Cannan contended that it was not in the interests of justice to permit appeals after long periods of delay.  The decision under appeal was made in April 2004 and related to an accounting period that expired on 30 September 2000.   The time limit for an appeal expired on 8 October 2004:   notice of appeal itself was not served until 15 December 2005.  The delay in serving the notice of appeal amounted to more than a year, and must be considered against Medical House’s entitlement to a tax credit which arose in September 2000.   He submitted that the period of delay in the instant case weighed heavily against the granting of an extension of time to appeal. 

14.	b)  intentional failure to comply:
It was plain, in Mr Cannan’s submission, that Medical House must have made a conscious decision not to appeal between 8 October 2004 and 9 June 2005:   in that sense, the failure to comply was intentional.

15.	c)  good explanation for the failure:
The only explanation for the failure to appeal that had been offered was that Medical House was acting on HMRC’s interpretation of the law pre-Kretztechnik which had proved to be incorrect.  Mr Cannan maintained that that explanation was, to say the least, unsatisfactory, since there was a public interest in the finality of litigation, including that relating to VAT obligations within the statutory framework for repayments of tax 

16.	He accepted that there was established case law whereby Member States were required in principle to repay taxes collected in breach of Community law, but observed that Member States were permitted to place procedural limitations on the recovery of such taxes, see Marks & Spencer plc v Customs and Excise Commissioners [2002] STC 1036 at paragraphs 34 and 35:

	“The principle of effectiveness

34.	It should be recalled at the outset that in the absence of Community rules on the repayment of national charges wrongly levied it is for the domestic legal system of each member state to designate the courts and tribunals having jurisdiction and to lay down the detailed peocedural rules governing actions for safeguarding rights which individuals derive from Community law, provided, first, that such rules are not less favourable than those governing similar domestic actions (the principle of equivalence) and, second, that they do not render virtually impossible or excessively difficult the exercise of rights conferred by Community law (the principle of effectiveness) (see, inter alia, Aprile Srl (in liquidation) v Amministrazione delle Finanze dello Stato (No.2) (Case C-228/96 [2001] I WLR 126, para 18, and the judgments in Dilexport Srl v Amministrazione delle Finanze dello Stato [1999] ECR 1-579, para 25, and Metallgesellschaft Ltd v IRC [2001] STC 452, [2001] Ch 620, para 85).

35.	As regards the latter principle, the court has held that in the interests of legal certainty, which protects both the taxpayer and the administration, it is compatible with Community law to lay down reasonable time limits for bringing proceedings (see Aprile Srl (in liquidation) v Amministrazione delle Finanze dello Stato (No 2) [2001] I WLR 126, para 19, and the case law cited therein).  Such time limits are not liable to render virtually impossible or excessively difficult the exercise of the rights conferred by Community law.  In that context, a national limitation period of three years which runs from the date of the contested payment appears to be reasonable (see, in particular, Aprile, para 19, and Dilexport Srl v Amministrazione delle Finanze dello Stato [1999] ECR 1-579, para 26).

17.	It was irrelevant that in the same circumstances today, Medical House’s claim would have been accepted if made timeously.  Mr Cannan submitted that it was only in exceptional circumstances that an extension of time to appeal should be granted where the appeal had been prompted by a change in the law or a change in understanding of the law (see Property and Revisionary Trust v Templar [1977] 1 WLR 1223).   It was clear that the interests of legal certainty also protected the revenue raising authority:   there was a public interest in the finality of assessments or other VAT obligations analogous to that involved in the finality of litigation. 

18.	The question of legal certainty was most recently considered by the Court of Appeal in Fleming t/a Bodycraft v Customs and Excise Commissioners [2006] STC 864 which also concerned the application of transitional provisions for three-year capping introduced in 1997.   Speaking in a general context in that case, Arden LJ stated at paragraph 46 of her judgment: 

“The principle of legal certainty means that the person affected by a provision of the law must be able to foresee the manner in which it is to be applied, particularly where the law has financial consequences for him, and he has a legitimate expectation that this principle will be observed”.  

19.	Mr Cannan observed that in the instant case Medical House, having accounted for the tax on its professional fees, had until 31 October 2003 in which to make a claim for repayment.  He maintained that the fact that it left it to the end of that period gave rise to an onus to adhere strictly to subsequent time limits. 

20.	d)  responsibility for the failure:
Mr Cannan contended that it was clear responsibility for the failure rested with Medical House.  Its rights of appeal had been notified to it in the review letter of 17 September 2004. 

21.	e)  the effect of granting an extension 
As mentioned above, Mr Cannan contended that there was a public interest in the finality of assessments and other VAT obligations, subject only to the appeals process and three year capping.   He submitted that there would be prejudice to HMRC if that interest was diluted by effectively side-stepping the three year cap and allowing appeals such as that of Medical House to be made out of time. 

22.	f)  merits
HMRC accepted that on the basis of Kretztechnik, Medical House would have been entitled to a credit.  However, Mr Cannan submitted that should not be a significant factor in the circumstances of the instant case.  The remaining factors had such weight that there should not be an extension of time. 

23.	In any event, he contended, the appeal would be bound to fail.  The claim submitted on 5 October 2003 was finally determined by 17 September 2004.  Hence the letter of 9 June 2005 amounted to a new claim which was itself the subject of the three year cap, see University of Liverpool v Customs and Excise Commissioners (2000) Decision No. 16769.  

24.	In reliance on the decision in University of Liverpool, Mr Adam Rycroft, for Medical House, submitted that it was implicit that a claim which had not been completed in one way or another remained an open claim.  In the instant case, he maintained that until HMRC came to a final decision on Medical House’s claim, there was no decision appealable to the tribunal.  HMRC’s letter of 24 January 2005 was ambiguous in not indicating whether its claim was wholly rejected.  And any ambiguity as to whether a claim remained open should be resolved in favour of Medical House.  It would be contrary to the objectives of finality and certainty if a claim could remain open to a limited extent.  Mr Rycroft submitted that the appropriate “decision” was that contained in the letter of 24 November 2005.  If I were to accept that, Medical House’s appeal would not be materially out of time. 

25.	Alternatively, Mr Rycroft submitted that the relevant decision was that of 29 April 2004.  He accepted that  necessarily meant Medical House relying on the tribunal’s jurisdiction to hear an out of time appeal.  Its discretion should be exercised fairly and reasonably and, were it to do so, fairness alone dictated that Medical House should be allowed to pursue its appeal.  First, it should be allowed to do so because HMRC’s decision failed to inform Medical House of its right to appeal.  (Mr Rycroft accepted that there was no statutory requirement on HMRC to do so).  HMRC applied the fair and reasonable test on a regular basis.  In the instant case, Medical House was unrepresented at the relevant time, and there was some indication that it did not fully understand its rights of appeal.  The letter of reconsideration of 17 September 2004 allowed Medical House a further 21 days to appeal – that was not consistent with the usual process and it was not within HMRC’s jurisdiction to give the permission.  In the instant case, HMRC sought to ensure that the rules as to time limits were applied strictly, whilst not so observing them themselves. 

26.	Whilst accepting that Medical House’s delay was significant, Mr Rycroft secondly maintained that the cause of the delay was also relevant.  In the instant case, HMRC had themselves substantially contributed to the delay.  For instance, HMRC’s letter of 17 September 2004 was in response to a letter sent to them some 20 weeks earlier.  He also contended that responses from HMRC had been apt to confuse Medical House.  Their letter of 18 July indicated that the claim would be met, subject to its being checked and Medical House’s taxable status being confirmed;   and the earlier letter of 24 January 2005 indicated that they would undertake a further review were new evidence to be provided.  Both letters implied that the claim remained open. 

27.	Mr Rycroft submitted that the significant delays caused by HMRC and the inappropriateness of many of their responses merited Medical House’s case being allowed to proceed out of time.  He further submitted that, to the extent that Medical House required any excuse for its conduct in not instructing professional advisers to deal with its claim until recently, it could be said to be due to the relatively small amount of tax in dispute.

Conclusion
28.	At paragraph 26 of my decision in the University of Liverpool case, I indicated that a ‘completed claim’ included one which had been rejected by HMRC in full and the time limit for appealing against that rejection prescribed by rule 4(1) of the VAT Tribunals Rules 1986, as amended, had expired.  Rule 4(1) requires a notice of appeal to be “served at the appropriate tribunal centre before the expiration of 30 days after the date of the document containing the disputed decision of the Commissioners.”  

29.	In the instant case, HMRC’s letter of 29 April 2004 constituted a rejection of Medical House’s claim in full, so that its claim became completed on the time limit prescribed by rule 4(1) expiring.  But since both parties appear to accept that, following a request by Medical House for a reconsideration of the decision contained in the letter of 29 April, HMRC’s letter of 17 September 2004 constituted  complete rejection of the  claim, in the instant case I am content to adopt their interpretation of it.   On that basis, Medical House had 30 days from 17 September 2004 in which to appeal.

30.	It will be recalled that Mr Rycroft sought to substitute HMRC’s letter of 24 January 2005 as the decision against which Medical House’s appeal lay, maintaining that its terms were “ambiguous” in not indicating that the claim was wholly rejected.  I accept that the letter indicated that HMRC were prepared to carry out a further review of their rejection of Medical House’s claim were new evidence justifying that step to be provided, but in my judgment that indication did not prevent the letter of 17 September 2004  forming the basis of a completed claim.  In my judgment, the decision against which Medical House’s appeal was to be made was that contained in HMRC’s letter of 17 September 2004

31.	I agree with Mr Cannan’s submission that it is not in the interests of justice to permit appeals after long periods of delay.  So far as I am aware, Medical House has never offered an explanation for the long delay in making its input tax claim, and whilst that delay is but one matter I must consider, it necessarily meant HMRC having to recover earlier records and to consider the matter against an historical background.   Viewed against that background, I do not find it surprising that HMRC took some time properly to deal with the matter, and it is not a matter for which I believe they can be criticised.  Medical House’s appeal was not served until 15 December 2005, some 14 months after the decision under appeal was made.  In my judgment, that period of delay was unjustifiable, and must represent an intentional failure to comply with the Tribunal Rules.   Even if, acting on its own behalf, Medical House was unfamiliar with the Tribunal Rules and not aware of the time limits they imposed for the service of new appeals, and HMRC failed initially to give notice of its right to appeal, the letter of 17 September 2004 referred to the right to appeal.  Had that been acted upon either within the time limit therein referred to, or possibly shortly afterwards, Medical House’s position would have been protected, and since appeals to these tribunals attract no fees, it would have been at little or no cost to the company.

32.	If Medical House had any doubt about HMRC’s interpretation of the law on input tax recovery connected with share issues pre-Kretztechnik, it ought to have served a protective appeal as it could not have predicted the outcome of the Kretztechnik case in September 2004.  Were I to grant Medical House’s application, there might be a flood of applications from companies which had similarly been denied input tax recovery prior to 2005, some of which might have more merit than that of Medical House.

33.	In the interests of legal certainty there must be public interest in the finality of VAT obligations such as the present one, and that interest must at least point to my dismissing the application.    I also agree with Mr Cannon’s submission that were I to grant the application, Medical House’s appeal would be bound to fail since its letter of 9 June 2005 constituted a new claim which is the subject of the three year cap. 

34.	As to Mr Rycroft’s claim that HMRC substantially contributed to the delay in service of the appeal by not replying to letters for long periods of time, I merely observe that since Kretztechnik itself was in the process of being dealt with by the ECJ, HMRC must throughout that period have been in some difficulty in dealing with input tax claims relating to share issues.

35.	Having carefully considered all the submissions of both parties, I reject Medical House’s application. 

36.	Although the application was heard in private, both parties indicated that it was appropriate for my decision to be released publicly, and I direct that it be so released.  I make no direction as to costs.  

DAVID DEMACK
CHAIRMAN
Release date: 2 November 2006

MAN/05/871